Mary Holm: KiwiSaver not just a work-based scheme

It's really misleading when people talk about a workplace savings scheme. It's more than that.

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Q: I did a search on KiwiSaver and invalids beneficiaries and found you had answered one lady previously. I have a similar question.

I am 47 years old, live alone and am on the invalids benefit and disability allowance. I am told that it is very unlikely that I will ever be well enough to work again. I partly own my home ($300,000) and the remainder is owned by a family trust. I have about $1500 in savings and no debts. Life is not easy!

My question is should I join KiwiSaver? If the answer is yes, and I can get help from my brother or a friend, how much a month would they have to pay into my scheme? And when I turn 65, how much would I have, and how much would I have to reimburse my brother/friend?

It all seems too good to be true - and effectively it makes my brother have compulsory saving also, and the interest rates are favourable for him also.

I'm so pleased to have found your advice on this, as I thought (from all the advertising) that I needed an employer to contribute.

A: I agree that it's really misleading when people talk about KiwiSaver as a workplace savings scheme. It's more than that. Every New Zealander under 65 can benefit from it - including you.

Firstly, regardless of whether someone else helps you, you should sign on. That will give you the $1000 kick-start and you don't need to contribute anything. At a conservative return of 2 per cent a year after fees and tax, you would have more than $1400 at 65. In a riskier fund returning 5 per cent after fees and tax, it would be nearly $2400. That's not to be sneezed at.

But wait! As you've read, with the help of your brother or a friend - let's call him Buddy - you can do much more.

The idea is that Buddy makes a loan to you by contributing to your KiwiSaver account. Preferably, he'll put in $1044 a year - perhaps an automatic $20 a week or $87 a month, but it could be a lump sum or any other pattern of contribution between July 1 and June 30 each year. In July or August the Government then contributes 50c for every dollar from Buddy, up to a maximum of $521.

Buddy can reduce or stop his contributions at any time. But of course it's better if he keeps it up.

How much are you likely to have at 65? The KiwiSaver calculator on sorted.org.nz says about $52,000, or nearly $37,000 adjusting for inflation, if you invest in a middle-risk balanced fund. (Note the "inflation adjusted results" button at the top of the results page.)

However, that calculator assumes Buddy's contributions increase with inflation each year, whereas we're simply looking for steady contributions to maximise the tax credit. Let's just say you can be pretty confident of ending up with at least $40,000 - without adjusting for inflation.

At that point, you repay Buddy. There are two ways to work out how much:

• Use Sorted's savings calculator, with the inflation adjustment at the top switched off because in this context it just confuses things.

The calculator tells us that, if Buddy has put in $87 a month and you assume he gets a net return of 2 per cent a year, you will owe him about $21,800. If you want to give him 4 per cent - a pretty good after-tax rate - you will owe him about $26,200.

• A simpler way is to firstly subtract about $2000 to allow for the kick-start and return on it (see above). On the rest of the money, Buddy put in two-thirds ($1044 a year) and the Government put in one third ($521 a year), so give Buddy two-thirds and keep the rest.

If you have a total of $40,000 at 65, Buddy would get two-thirds of $38,000, or $25,333. His return is whatever the KiwiSaver account has earned.

The rest, of course, is yours.

We should note here that the age at which you get access to KiwiSaver, and the tax credits stop, is NZ Super age. By the time you get there it might be older than 65. But that doesn't really matter. In fact, it gives you a bit more in tax credits.

It would be best if you put your arrangement with Buddy in a letter signed by both of you. You might want to put your copy of the letter with your will.

Reverse mortgage

Q: My wife is 71 and I'm 83, and due to health problems we are unable to work.

Some years ago we wished to renovate our home unit, which is built of permanent materials in a good residential area.

To assist with these alterations we reluctantly took out a reverse mortgage for $41,290 and this has now increased to $61,835.

Before undertaking this mortgage we sought my solicitor's advice and some from successful business friends who felt it a good idea.

This problem is causing us both many sleepless nights and we would greatly appreciate your help.

To complicate matters we have both been previously married, and any monies from our estate will be shared proportionately.

Mary, we need help and your advice.

A: As I said in this column late last year, reverse mortgages have their pluses. They enable people to borrow against the equity in their home, usually in retirement, and make no repayments until the house is sold.

Presumably your home is now nicer and more valuable. But the big negative is that the loan value grows fast because of compounding interest. Your solicitor and friends should have pointed that out to you.

I suggest anyone contemplating a reverse mortgage should get the following in writing from the lender:

• How much the loan will be in five, 10, 20, 30 - even 40 years if you're in your 60s - at current interest rates.

• The same data but with interest rates three and six percentage points above the current rate. Who knows what's in store decades from now?

The longer-term numbers at higher interest rates are likely to be shockingly high. Keep in mind that the value of your house will probably also rise over a long period. But nobody knows how much, given the volatility of property values and the huge variation from house to house and region to region.

If the numbers make you feel uneasy, borrow less.

That's not much help to you two, though. I can only suggest that you have an honest discussion with your heirs to see if they could help you repay the loan, knowing that will mean more money for them after you die. Check first, though, whether there's a substantial early repayment penalty.

I wonder if your solicitor could help set up a family meeting - perhaps at a low or no fee - given that he or she seems not to have fully explained what you were getting into.

If family help is not feasible, you may be able to take some comfort if you borrowed the money from a member of the Safe Home Equity Release Plans Association (Sherpa). Current members are:

• Sentinel, from around 2005.

• Bluestone Equity Release from 2007.

• DPL Insurance (formerly DorchesterLife) from 2007.

Also, Saving and Loans was a member from 2007 to March 2008, when it stopped writing new loans, says Rob Dowler, Sherpa's executive director.

Sherpa's code of practice includes some provisions that members have voluntarily committed to. Under normal circumstances, the borrower:

• Will never owe more than the net sale proceeds of their property.

• Is guaranteed the right to live there for life.

• Won't have to repay the loan until they no longer live in the house.

• Can transfer the loan to another suitable property without financial penalties.

The code also says that a member must ensure the borrower has got independent legal advice. And "prior to completion the member must receive a certificate from the solicitor confirming the borrower's legal competence, and that the product's benefits and obligations have been explained to them".

If your lender is a Sherpa member, you might ask your solicitor about this. For more on the code of practice and other info, see sherpa.org.nz.

Anyone getting a reverse mortgage from a non-Sherpa member might also find this a useful source of questions to ask their lender and adviser. Speaking of solicitors, the Law Society has made available to its members "Reverse Mortgages Guidelines for Solicitors". One way of judging whether a lawyer is up with the play in this area would be to ask him or her if they use those guidelines.

Lending risk

Q: Regarding reverse mortgages, maybe I am being naive but surely the lending risk is very low in most instances. Surely 7.25 per cent interest is rather high in a situation where the lender is guaranteed repayment on what would be only a small fraction of the overall value of the property.

Therefore your idea of family coming to the rescue makes a great deal of sense. I am sure there could be many pitfalls. But as you say, with careful legal agreement it could be beneficial, especially if the load is divided between several parties.

A: You're quite right that family arrangements can be better than a reverse mortgage, as discussed in this column late last year. (See nzherald.co.nz or maryholm.com and do a search on reverse mortgages.)

But I don't think 7.25 per cent - ASB Bank's rate - is excessive for a lender that operates under the Sherpa provisions or ASB's similar provisions. That's because reverse mortgages are riskier for a lender than ordinary mortgages.

Why? For one thing, if the borrower lives for many years and the compounding loan gets really big, it's possible the loan will exceed the house value. This is particularly true in areas of slow or no population growth, where house values are more likely to fall. Sherpa members or ASB would have to take a loss if that happened.

Another risk is that customers - like the ones in the previous Q&A - won't fully understand how fast reverse mortgages can grow. This could lead to negative publicity for the lender.

Reverse mortgages also take considerably more time to set up than ordinary mortgages.

More on this topic next week.

• Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.